Foreclosures, Short Sales and Flips. Oh, My!

[Micki]

I’m doing an FHA appraisal for a reverse mortgage in a market dominated by foreclosures, short sales and investor flip properties. I’m looking at a printout of 18 sales within 1 year and a radius of about 1.5 miles. I found only 4 traditional sales, most of which were sold over 6 months ago. My first inclination would be to use the comparables in closest proximity with the most recent sale dates regardless of their status. My reasoning for this is that distressed properties are the marketplace now, and investor flips are the new arm’s length transactions. The flips are not selling at prices significantly over that of the distressed properties ... the prices per-square-foot are right in line with the average range for other properties.

I haven’t run into this problem before with an FHA appraisal, and I’m wondering if anyone has any advice for how to deal with this situation. Is HUD going to have a problem with the use of flipped properties as comparables if they are arm’s length transactions? I wouldn’t think so, since they still provide FHA mortgages for them within their guidelines. As for the foreclosures and short sales, the market is what it is, and I’m hoping that a decent explanation will suffice. I believe the comps in the area are certainly more reliable than trying to go out farther to find suitable traditional sales that are truly arm’s length transactions (lots of probate and estate sales in there too).

If there is a particular portion of the HUD handbook, or a mortgagee letter, that specifically addresses this situation, I’d sure like to know what it is. Any good articles relating to the subject would be appreciated, too, and of course, your professional opinions.

 

[J Grant]

I think you are on the right track with all your thinking and analysis. Just disclose the flip sales for what they are and of course prior sale. A mix of sales of similar condtion and size of subject might be best option. HUD had an advisory opinion a while back saying appraisers could consider use of REO sales when needed for credible assignment results making any market indicated adjustments for conditon etc. Some appraisers adjust for sale type (REO status), I tend not to. That is a market and practice decision that nobody can tell you what to do...lay out the best comps on the grid and see where you end up...listings and pendings would be important as well to see where market is trending.

 

[Randolph Kinney]

http://portal.HUD.gov/hudportal/documents/huddoc?id=pfaq.pdf

When, if ever, are stressed sales (short sales, foreclosures, etc.) valid comparables?

If distressed sales appear to be driving the market the appraiser should stronly consider using them


Guide Note 11: Comparable Selection in a Declining Market

http://www.appraisalinstitute.org/ppc/downloads/2011_guidenote_11.pdf

 

[Randolph Kinney]

Can FHA Roster appraisers use foreclosures, short sales and other
distressed sales?

FHA Roster appraisers must perform a neighborhood analysis to determine
and identify the geographic area that is subject to the same influences as the
property being appraised. The appraiser is responsible for selecting
comparable sales and, if foreclosure or short sales are prevalent in the
subject’s market, the appraiser must consider the impact these sales have on
market conditions, including marketing times, list to sale ratios, absorption
rates, etc., in making the decision to use a distressed sale. A foreclosure or
short sale may have condition deficiencies that are not readily apparent.
Before relying upon foreclosure or short sales as comparable sales, it is
imperative that the appraiser perform the necessary due diligence to fully
understand the circumstances surrounding such sales and the impact upon the
subject’s value and marketability. FHA Roster appraisers must fully explain
and support the sales used in the appraisal report with a thorough analysis of
market conditions, which include the types of sales found within the market,
i.e., new construction, resale, short sales, foreclosures, REO and /or estate
sales. The appraiser should attempt to balance the analysis by using more
than one sale type, if representational of the market, and contrast the
differences of market impact between the sales in order to provide support for
the report’s conclusions.

See page 26

http://portal.HUD.gov/hudportal/documents/huddoc?id=aprval.pdf

 

[Randolph Kinney]

APB Valuation Advisory #3: Residential Appraising in a Declining Market

https://appraisalfoundation.sharefile.com/d/s312c40fc01b4987b

 

[Tim The Enchanter]

Good links Randolph.

The problem with short sales is the seller may not or probably is not typically motivated. Doesn't meet the definition of market value.

I always try to get at least 1 non distress comp in there, and try to avoid the shorts. But I've seen condos where everything is REO or short sale. Even SFR neighborhoods, such as those built circa 2005 - 2007. Use what you have and explain. m2:

 

[NC Appraising]

My opinion:

1. Realize what market you are in. I do a lot of FHA REO properties, and the condition of the property is the driving force.

In a REO driven market, if REO sales are in similar condition to your subject, then more than likely they are the best comps. If your subject is in superior condition to REO sales, I would either make condition of sales adjustments with condition adjustments or expand my search to find more similar sales.


2. Know your market well. HUD hires a appraiser to set the list price. They have a BPO done and the BPO has a 30 day value. HUD wants the property sold within 30 day's. OCWEN wants a 15-30 day value. I rarely use the above for comps.

Others like Fannie Mae are now painting, making minor repairs, etc.

The HUD REOs and the Fannie REOs in my market are much differant. HUD REOs represent a liqudation of a quick sale value and usually sell for much below what other REOs sell for. Study and know your market.


3. Is the market still being driven by REOs and short-sales? In my market, these properties have dried up. The past is the past, is the past. The appraised value is as of the effective date of the appraisal. Condition of sale adjustment or a time adjustment if you do use REOs?


4. Flips. In my market these are selling for 3%-10% under what traditional market sales sell for. Investors typically sell for slighty below market value due to their holding costs, etc. "Set the market, do not chase it". Time is money.



http://www.valuationreview.com/VR/A...luation-Review-partner-for-free-di-56385.aspx

 

[Micki]

Thanks for all the great replies and helpful information! I've got a much better idea of how to develop is report now.

Here's wishing you all a good evening. It'll be an early night for me, and up early to start working on this thing.

 

[residentialguy]

Distressed properties may be "driving" the market....but MV is not to be that of a distressed sale. Your traditional sale, as well as your flip (adjusting for any updating) will be more in line with Market Value. How much the distressed sales are driving the market will be reflected in the price of the non-distressed sales (traditional). If there is a market reaction to the conditions of sale or stigma of REOs or Shorts (which will result in a sale price variance), appropriate adjustments are to be made so the sale reflects MV...a sale without undue stimulus to sell.

 

[SANDY]

Distressed properties may be "driving" the market....but MV is not to be that of a distressed sale. Your traditional sale, as well as your flip (adjusting for any updating) will be more in line with Market Value. How much the distressed sales are driving the market will be reflected in the price of the non-distressed sales (traditional). If there is a market reaction to the conditions of sale or stigma of REOs or Shorts (which will result in a sale price variance), appropriate adjustments are to be made so the sale reflects MV...a sale without undue stimulus to sell.

The NAR kool-aide is strong this month! At least the "famous appraiser" got an NAR chairmanship out of carrying their banner. What's in your wallet?